The Asset Flywheel

I want to talk about an investment strategy that I’ve implemented since buying my first business back in 2017. My wife and I have always been pretty frugal with our expenses, so we have always saved as much of our business income as possible. This capital that grew in our business bank account wasn’t being invested though and wasn’t really worth investing into our current business. Our cleaning business just didn’t need an investment of capital to continue to chug along. Spending $50,000 on it wouldn’t move the needle sufficiently to justify the expense.

We needed an investment vehicle for this capital we were accumulating, and for the longest time, we didn’t really know what it was. We just kind of let money pile up in the bank a little bit. We dabbled in the stock market and wound up making a couple of good trades that made us a small percentage, but in the end, it felt riskier investing business capital into the stock market than it does with our personal investment accounts.

However, we decided that we could use this growing capital we were accumulating to either acquire a smaller business in the same industry as our cleaning business or maybe even in a business that was complimentary. A business that perhaps uses cleaners as a vendor, and so we could double-dip on our services.

This plan had a lot of potential, but after doing some searching it became obvious that while this could be very profitable, it was going to take significant time because most of the businesses that we could buy that came close to fitting our criteria were in the $300,000 to $750,000 range. It would take years to get enough money in the bank to buy these, or even be able to put in a significant deposit and apply for financing for the remainder.

Once we discovered that we could buy online businesses for a fraction of the cost of a traditional business and that the ROI on these businesses was actually really good, it became clear we could just buy an online business when we had some spare money, and then continue doing this. In fact, as our personal expenses didn’t change at all, all the income from these secondary businesses would add directly into our acquisition fund for further online businesses.

I didn’t have a name for this philosophy it was more just an investment strategy that we figured was optimal and It turns out that Gregg from Empire flippers has recently coined the term the Asset Flywheel. it’s a pretty good description For the philosophy that we had been following, it basically describes adding as much revenue into your capital investment as possible in order to get it spinning faster and creating more revenue.

I’m sure you’ve heard of Compound Interest, and I’m sure you have seen the examples of how people can invest small amounts of money into an RSP or some other investment that would generate huge amounts of money over long periods of time. People who invest $50 a month for their entire career ($24,000) in 40 years having a balance of over $130,000 at the end of it. This is a great example of how over the long run, compound interest will grow drastically.

However, what if you waited 20 years to start this investing? What if you only invested $50 a month for 20 years, instead of 40? Well, that late starter would have only $26,000 in their account at retirement. A massive difference in the power of compound interest. The Longer you let compound interest act, the better it gets.

I suppose that an asset flywheel is really just a new term for compound interest. You can think of the income you make from your business or your investment as interest, and reinvesting as much interest as you can back into your capital investment could be considered very similar to compound interest.

The difference is that while compound interest is a silent engine of wealth that grows over the course of your entire lifetime, buying, selling and operating businesses takes effort and some skills. However, because of the availability of assets even in the $20,000 to $50,000 range, it is extremely easy to kickstart the Asset Flywheel into gear. This in turn can transform a small investment in your first online business into a multimillion-dollar empire within only a matter of years. and I can prove it! Just like the famous subreddit; I did the math.

The key to this concept is maximizing your revenue for the capital investment you have access to, calculating your expenses, and keeping them as low as possible.

The other factor to consider is your age, your investment horizon, and what type of sweat equity you are willing to put into a business in order to grow and maintain it.

Time Investors

I’m going to use the term Time Investors, and what I mean, is an investor who is still willing and able to put some sweat equity into a business. Especially one who is willing to do the even harder task of learning new skills, sharpening their expertise, or even willing to pivot their energy to a more profitable skillset.

I would put myself into this category, as I’m still willing to start something new and learn necessary skills that I may be deficient in. I won’t be learning every skill because it’s just better to hire an actual expert for some tasks. Pick and choose the skills you think may be useful to have in your toolkit before committing the time necessary to gain sufficient expertise in those skills.

For instance, everyone has an hourly wage that they pay themselves. As a new investor, or business owner it may not be a lot, and you may decide to take on significant tasks that would be expensive to hire someone for.

However, if you are already making a good income, and don’t want to invest more time into a particular task that you could easily hire someone to do, then it makes perfect sense to have them do it for a certain wage.

The benefit of being a “Time Investor” is that you have more surface area of time to work with. Not because of your age necessarily, but the availability of time. If you have a full-time job and a family, you don’t have as much time available as someone fresh out of High School or College, or even someone who is retired might have.

Age can potentially play a role though because when you are younger, you might be more inclined to invest some time into education. That time spent in education will be invaluable to you in the future, as you retain all of that knowledge and expertise and employ it not only in your business but in your career and life.

Equity Investor

The opposite of a Time Investor is an Equity Investor. Again, these are my terms, don’t be confused by other (smarter) people who may be using these terms in a different (better) way.

An Asset Investor would be someone who has already acquired some wealth, and is looking to make a significant Capital Investment in something, and most likely is looking for a relatively hands-off approach to their business.

Maybe they have a few employees or business partner(s) who will be handling some of the day-to-day, and they will be more of a silent partner taking less of the income than the active business partners, but working far less on the business in return.

Alternatively, maybe they just pick an investment that doesn’t require huge time commitments and can manage easily on only a few hours a month.

This type of investor is looking to cash in on their accumulated wealth and let the income from those investments run on auto-pilot.

Can both Investors use the Asset Flywheel?

Yes, of course. The main difference between these two types of investors–and there are a lot more types of investors–is that they come into the Asset Flywheel from a different starting point.

The Time Investor will be entering the flywheel strategy with likely a lot less capital and a lot more time to invest. This means that income from the investments they make will be lower, and it will take longer to for the full power and speed of the Asset Flywheel to gain momentum.

However, this Time Investor also has a huge benefit. Their availability of time. Time spent on almost any business should in some measurable way equal growth in the business. This growth is paramount for the Time Investor since the fastest way to turbocharge your Asset Flywheel is with aggressive increases in business value. This value equals not only greater income from the business monthly but also a much greater return, if and when you sell the business.

Either angle you are approaching the Asset Flywheel, if you are graduating High School this month and need to find a direction, and find this interesting, then your main focus should be educating yourself as much as you can in skills and practices that will give you a greater chance of success when you do have the capital to purchase your first major asset.

Alternatively, if you have the skills and the passion to start a business from scratch, and you can fit it into your schedule, this is probably the best way to get started with zero capital and still benefit from the Asset Flywheel. Most online businesses will take a few years to become profitable enough to warrant selling, but once they do, you have now accumulated the income from that business for the past few years, as well as a sizable chunk of money from the sale of that asset, and are ready to run headfirst into the Asset Flywheel.

Symbiotic Relationships

One potential mistake I made when I started buying online businesses was to try and diversify my online assets a lot, in the case one niche happened to have a bad Google Update and fell in rankings or search value, etc.

Now, I’m not saying put all of your eggs into one basket, but diversification can also mean a loss of potential income that is totally 100% free.

Let’s say you have $500,000 invested in a diverse portfolio of online businesses. You have an FBA business that is based on Real Estate, one display advertising website based on Video Games, and a few other unrelated assets. They may provide you some security from collapse in one particular niche, but there is also potential lost revenue you may have missed because none of your assets can leverage another.

For example; if you have a handful of websites, and they are semi-related, you can use them to point to one another, and try to move visitors from one website to the other, and vice-versa. Maybe you sell a product with one business that another business’s audience can benefit from. This could be an extremely profitable situation to be in, and while you don’t want to necessarily expose yourself to the collapse of a single niche, it would be smart to keep some of your assets adjacent to one another, to benefit from this symbiosis where it makes the most sense.

Again, do your math. Try and assess what your risk of trends or algorithm changes could be, and weigh it against the potential revenue from keeping assets in a symbiotic relationship.

The Asset Flywheel is an immensely powerful tool that if executed diligently, can really propel your financial situation forward in a meaningful and significant way.

For some examples of how much money could be made with certain Capital Investments, and some deep dives into the math, watch our video here where I attempt to run through some scenarios.